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At the end of the day, no matter what your paycheck reads, you still have to save and invest your money if you want to accumulate wealth.
Are you setting aside enough? To help you evaluate, we’ve rounded up nine red flags to watch out for.
You can barely pay your bills each month
Are you just meeting your obligations each month? This is known as “living paycheck to paycheck,” and makes it nearly impossible to build up significant savings.
How to improve: You have two options: Earn more money, or spend less. If you go the first route, take a look at lifestyle changes to make if you want to earn more, steps to negotiate a raise, and ways to make extra cash while working full-time.
If you’re aiming to spend less, check out lifestyle changes to make if you want to spend less and saving strategies from everyday people who retired before 40. You may also want to think about reducing your largest costs, like your rent or transportation, on top of spending less on a daily basis.
You tell yourself you’ll save more when you start making more
“How you manage $100 is likely how you’ll manage $100,000,” she says. “You’re the same person with the same attitude, and the same behaviors and habits. It’s not about getting more money. It’s about being more disciplined with the money you have.”
Plus, she adds, “when I earn more” isn’t a date of action. “Someday is not a day on the calendar. We really have to do a better job of buckling down and saying ‘I’m ready to take action.'”
How to improve: Don’t wait until the new year, after graduation, for a birthday, or when a tax refund arrives in the mail to start saving.
Think about your savings as a fixed cost – something you must pay every month, like rent and your cell phone bill – before you spend on dinners out and other “wants.” Next, consider setting up a recurring automatic transfer from your checking account to a savings account – this way, you’ll never even see the money and will learn to live without it.
- Flickr/Leo Hidalgo
You haven’t started saving for retirement
Saving for retirement can’t wait, no matter how far off it may seem.
If you’re putting it off, you’re not alone: A third of Americans have $0 saved for retirement, according to a 2016 GOBankingRates.com survey. Moreover, the survey found, 56% of Americans have less than $10,000, and approximately 75% of Americans over 40 are behind in their savings.
How to improve: Saving for retirement can take a few different forms – a company-sponsored 401(k) or an IRA are two of the most popular savings vehicles – but no matter how you choose to save, the best thing you can do is start early.
Many experts recommend setting aside at least 10% of your income. That being said, if you’re only comfortable with setting aside 1%, it’s better to start there than not get started at all.
There’s a lot of advice on saving for retirement out there: Check out the seven questions to ask yourself before deciding you’re ready to retire, ways to guarantee you won’t save enough money to retire, and how much money you’d need to save every day to become a millionaire by 65.
You don’t set aside money for big, upcoming purchases
It’s important to contribute money toward a retirement fund, but you can’t neglect other major expenses.
You’ll want to have savings if you’re planning on having kids – the USDA estimates the average cost to raise a child at about $245,000, and that doesn’t include college – or looking to buy a home, which often requires significant savings just for the down payment. Other big purchases you may want to think about include a car, graduate school, or vacation.
How to improve: Start by establishing what is important to you and what you want your future to look like, which will make it easier to create savings goals. Next, you’ll want to figure out how much you would have to save, how long you would have to save for, and at what rate of return you might need your investments to grow in order to reach those goals.
It may be helpful to set up multiple savings accounts in order to save for specific purchases. Check the online interface of your bank and see if it will allow you to create sub-savings accounts.
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You haven’t started investing
Investing can be considered the single most effective way to start building wealth – and the earlier you start the better, thanks to the power of compound interest. If you feel like you don’t have any money to invest, you aren’t saving enough.
How to improve: Retirement savings are one way to invest, but if you want to get more involved, there are other avenues to explore: Start by researching low-cost index funds, a conservative approach recommended by Warren Buffett, or by looking into the low-cost online investment platforms known as “robo-advisers.”
Also, take a look at the 12 things everyone should know before investing, an investment adviser’s breakdown of the factors that lead to bad investing decisions, and the most important factors that contribute to investing success.
- Enrique Marcarian/Reuters
You don’t have an emergency fund
Establishing an emergency fund is one of the most important steps you can take with your money and should only be put on hold if you have credit card debt. If you haven’t prioritized your rainy day fund, chances are you aren’t saving enough.
How to improve: Create an emergency fund as soon as possible. Many experts, including billionaire John Paul DeJoria, agree that it’s smart to have six months’ worth of savings tucked away. You may personally need more or less depending on your situation.
You spend over 40% of your income on housing
“According to the Federal Housing Association (FHA), a good rule of thumb is that most people can afford to spend 29% of their gross income on housing expenses – as much as 41% if they have no debt,” explains financial adviser David Bach in his book, “The Automatic Millionaire.”
If you’re directing more than 40% of your income towards rent or your home, you’re losing out on a big chunk of savings.
How to improve: Consider downsizing – it’s more than possible to live large in a smaller space. If you’re shopping for a new home or apartment, establish your price limit and stick to it. You’ll also want to consider all of the hidden costs that come with buying a home and factor those into your budget.
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You don’t track your expenses
Most of us know how much cash is flowing into our bank accounts each month – but just how much is flowing out? Do you know how much you spend eating out, on monthly subscriptions, or on coffee? It’s probably more than you think – and chances are, you can cut back and save more.
How to improve: Track your cash flow by recording each purchase you make in a spreadsheet or notebook, or downloading an app that will categorize and monitor your monthly and annual spending, such as Mint, You Need a Budget, or Personal Capital.
Once you’ve figured out where you can cut back, redirect those expenses towards a retirement account, where it can accumulate and grow into thousands of dollars over time.
- Matt Cardy/Getty
You can’t pay more than the minimum on your credit card balance
If you can’t pay more than the minimum month after month, you’re overspending and headed straight towards credit card debt, where meeting your savings goals will be much harder. You should always aim to pay your credit card balance in full to protect your credit score and to stay out of debt – and if you can’t, you’re living beyond your means and falling behind on your savings.
How to improve: Divert money from another part of your budget or cut back on spending to free up your cash to pay more than the minimum.
If you have credit card debt, work towards eliminating it immediately. The longer you wait to pay it down, the more you’ll owe, thanks to interest, which can sometimes end up costing more than what you originally borrowed.
Take a look at 13 tips from people who paid off thousands of dollars of debt for inspiration and ideas.